Roubini Sees Risk of a Bank Run in Spain

Nouriel Roubini, the New York University professor who predicted the global financial crisis, said Spain’s financial troubles, without more assistance, are closer to a critical point than a resolution.

“Spain is too big to fail but also too big to be bailed out,” Roubini said today in a Bloomberg Television interview on “Surveillance Midday” with Tom Keene. He said the existing resources for bailouts are too small “to backstop the Spanish banks and the sovereign if there is going to be a run on them.”

European Union leaders will meet this week amid discord about how to stem a debt crisis that’s caused Greece and Ireland to accept bailouts.

“Unless the Europeans this weekend are going to decide to increase the envelope of those official resources, in the next few weeks you’re going to see a worsening of those spreads for Spain,” Roubini said, referring to the extra yield investors would demand to hold the country’s debt over that of Germany.

Moody’s Investors Service said yesterday it may reduce Spain’s credit rating from Aa1 by on concern about rising borrowing costs, potential losses in the banking system and deficits in the country’s regions.

CREDIT SUISSE: THE 5 BIGGEST RISKS OF 2011

In a recent strategy note Andrew Garthwaite of Credit Suisse covered what he believes are the biggest risks heading into 2011. On the whole, Garthwaite believes all 5 risks are manageable, which contributes to their expectations for 13% gains in the S&P next year. The 5 risks and the CS opinion of each is attached:

• Chinese inflation (as above), which we think is manageable until we see a sharp rise in export prices;

• Peripheral Europe. Critically, we think even under a severe private sector de-leveraging scenario, Spanish government debt to GDP would only rise to 100% by 2014E which would make its funding arithmetic sustainable, provided fiscal policy is tightened by another 2% of GDP (which should be politically possible). We think core Europe will continue to support peripheral Europe (the cost of it not doing so would be at least $500bn on our estimates); the European Financial Stability Facility (EFSF) is likely to be extended and the ECB is unlikely to withdraw from the policy of providing unlimited liquidity to the banks. Peripheral Europe needs Germany’s economy to grow well above trend (after all it is 50% larger than the periphery) – and that, we think, will continue to happen.

• The inventory rebuild has been extreme: normally, a reversal of an inventory rebuild of this magnitude is associated with a slowdown in growth. Yet, the level of inventories (to sales) is not extreme and there should also be a positive surprise to domestic demand, which again limits de-stocking; (more)
  

Treasury Yield Hits Seven-Month High

Treasury 10-year note yields touched a seven-month high as evidence the U.S. economy is recovering reduced demand for safety.

“It’s a snowball effect in Treasuries as we are seeing flow-driven trades that have been exacerbated by the improving economic data,” said Kevin Flanagan, a Purchase, New York-based fixed-income strategist at Morgan Stanley Smith Barney.

Yields rose earlier as reports showed Philadelphia area manufacturing beat forecasts, initial jobless claims unexpectedly fell and housing starts increased for the first time in three months. Yields pared gains as Moody’s Investors Service said it placed Greece’s Ba1 local and foreign currency government bond ratings on review for possible downgrade.

The yield on the 10-year note dropped less than one basis point, or 0.01 percentage point, to 3.53 percent at 11:54 a.m. in New York, according to BGCantor Market Data. The price of the 2.625 percent security maturing in November 2020 rose 2/32, or 63 cents per $1,000 face amount, to 92 1/2. The yield touched 3.56 percent, the highest level since May 13, after earlier falling to an intraday low of 3.46 percent. (more)

Jim Rogers: $2,000 Gold, $50 Silver

(TheStreet ) -- Jim Rogers, the famous contrarian investor, stands behind his prediction that gold prices will hit $2,000, but isn't buying any more gold at record highs.

Rogers has been a gold bull for years and well before this year's 25% rally. There are many ways to buy gold like the gold exchange-traded fund, SPDR Gold Shares(GLD), up 24%; gold stocks like the Market Vectors Gold Miners(GDX), a basket of large-cap miners, up 30%; or physical gold. Rogers favors the physical commodity.

Some analysts disagree with Rogers. Goldman Sachs(GS) called a top in gold at $1,750 sometime in 2012, while Jon Nadler, senior analyst at Kitco.com, says the top could come in 2011 especially as prices struggle to sustain prices above $1,400. (more)

3 early warnings signs of a market reversal

In our 20 years plus of option trading and educating investors, there are certain factors that we've seen time and again can help foretell when the market is on the verge of a trend momentum switch.

Beyond our innovative technical analysis indicators, we also utilize sentiment and volatility based measures that can often give us the "early warning" that something may be amiss in the markets.

The first of these is the CBOE Volatility Index (VIX), which I've been analyzing and utilizing since the early 1990s. The VIX measures in the implied volatility of S&P 500 Index (SPX) options -- this is a factor that is basically human-controlled and has swings based on supply and demand for options. To a large measure, it measures the "fear factor" in the market among option traders.

In recent years, VIX movements higher have tended to indicate that something is not quite right in the stock market and that large-scale selling may be imminent. For example, take a look at the following chart of the VIX and SPX from earlier this year:

In the above chart, you can see that the VIX (green) moved above its Top Bollinger Band (aqua bands) in April, before the market topped out. There was even another early warning about a week earlier where the VIX breached its Top Band but closed below it! Another bigger seismic move in the VIX followed at the beginning of May. The result: the stock market (SPX in yellow) dropped nearly 20% in the two months following this VIX move!

Oil Falls From One-Week High on Concern Warmer Weather Will Reduce Demand

Crude oil fell from a one-week high because of concern that warmer weather in the U.S. may reduce demand for heating oil.

Oil pared yesterday’s gains after the Energy Department said stockpiles of distillate fuel, a category that includes heating oil and diesel, increased 1.09 million barrels to 161.3 million. Normal or warmer-than-normal weather is likely in most of the Northeast and Midwest from Dec. 25 to Dec. 29, according to Commodity Weather Group in Bethesda, Maryland.

Middle distillate supplies were “a bearish number seasonally speaking,” Stephen Schork, president of consultant Schork Group Inc. in Villanova, Pennsylvania, said in a note to clients. “Last year saw a 2.95 million-barrel draw.”

Crude for January delivery fell as much as 57 cents, or 0.6 percent, to $88.05 a barrel and was at $88.15 on the New York Mercantile Exchange at 4:14 p.m. Singapore time. Oil increased 34 cents, or 0.4 percent yesterday to $88.62 a barrel, the highest settlement price since Dec. 7. (more)

Financial Analyst: This Is The First Recession Since the End of the FIRST World War Where Government Help Isn't Trickling Down to the American People

Banking expert Christopher Whalen (hailed by Nouriel Roubini as one of the leading independent analysts of the U.S. banking system) told the American Enterprise Institute that this is the first recession going back at least to the end of the first World War where government assistance has not trickled down to Main Street and ordinary Americans.

Why?

Because the banks are keeping the money and not loaning it back out: